Savers up in arms at low interest rates

Banks and building societies are heading for renewed confrontation with customers and regulators over the derisory rates of interest paid on many savings accounts.

A senior politician is calling for a government inquiry into the way that falling rates of interest are hitting people on low incomes, particularly pensioners.

The call, by Vincent Cable, the Liberal Democrats' trade and industry spokesman and a former member of the Treasury Select Committee, followed an investigation by The Observer showing that 40 per cent of accounts are paying rates so low that they do not beat inflation. The survey looked at 530 accounts listed in the industry rate bible, Moneyfacts. Most of the accounts rewarded high balances with above-inflation rates, but 60 paid less than inflation on balances of £100,000.

Rates of less than 0.5 per cent are now commonplace on branch-based savings accounts, the type favoured by older, and often poorer investors.

Last week Abbey National became the latest large savings institution to announce average cuts in savings rates in excess of the 0.25 per cent cut in bank base rate implemented by the Bank of England Monetary Policy Committee earlier this month.

Abbey cut by an average of 0.27 per cent, although one postal account has been cut by 0.35 per cent. The Government's own savings bank, National Savings, announced another cut in returns for savers last week. Its Ordinary Account is paying 0.75 per cent on balances under £500.

MPs are likely to face protests from pensioners over low returns on savings accounts when they return from their summer holidays. Rates could be cut even further if the base rate is slashed further this year.

Mortgage borrowers are celebrating rates at their lowest levels for more than three decades. But savers, who outnumber borrowers by more than seven to one, are also seeing their returns fall to historically low levels.

Cable said: 'Not only are far more people affected (by low rates), but it is generally the less well off.'

Past research has showed that the average household in the UK has savings of no more than £500.

Pensioners may question why the real value of their savings is being eroded even though they are among the groups that politicians say should be protected from high inflation.

Cable said: 'It would be desirable to have a proper study by the Treasury and the Bank of England to see who is being helped and who is being hurt by low rates.'